It’s economy 101 – when supply is low and demand is high,
prices naturally rise. That’s what’s happening in today’s housing market. Home
prices are appreciating at near-historic rates, and that’s creating some
challenges when it comes to home appraisals
In recent months, it’s become increasingly common for an
appraisal to come in below the contract price on the house. Shawn Telford,
Chief Appraiser for CoreLogic, explains it like this:
“Recently, we observed buyers paying prices above listing
price and higher than the market data available to appraisers can support. This
difference is known as ‘the appraisal gap . . . .’”
Why does an appraisal gap happen?
Basically, with the heightened buyer demand, purchasers are
often willing to pay over asking to secure the home of their dreams. If you’ve
ever toured a house you’ve fallen in love with, you understand. Once you start
to picture yourself and your furniture in the rooms, you want to do everything
you can to land the property, including putting in a high offer to try to beat
out other would-be buyers.
When the appraiser comes in, they look at things a bit more
objectively. Their job is to assess the inherent value of the home, so they’re
going to study the facts. Dustin Harris, Appraiser Coach, drives this point
“It’s important for everyone to understand that the
appraiser’s job in the end is to remain that unbiased third party, to truly
tell the client what that home is worth in the current market, regardless of
what decisions have been made on the price side of things.”
In simple terms, while homebuyers may be willing to pay
more, appraisers are there to assess the market value of the home. Their goal
is to make sure the lender isn’t loaning more money than the home is worth.
It’s objective, rather than emotional.
In a highly competitive market like today’s, having a
discrepancy between the two numbers isn’t unusual. Here’s a look at the
increasing rate of appraisal gaps, according to data from CoreLogic (see graph below):
What does this mean for you?
Ultimately, knowledge is power. The best thing you can do is
understand an appraisal gap may impact your transaction if you’re buying or
selling. If you do encounter an appraisal below your contract price, know that
in today’s sellers’ market, the most common approach is for the seller to ask
the buyer to make up the difference in price. Buyers, be prepared to bring
extra money to the table if you really want the home.
Above all else, lean on your real estate agent. Whether
you’re a buyer or seller, your trusted advisor is your ally if you come up
against an appraisal gap. We’ll help you understand your options and handle any
additional negotiations that need to happen.
In today’s real estate market, it’s important to stay
informed on the latest trends. Let’s connect so you have an ally to help you
navigate an appraisal gap to get the best possible outcome.